Home Loans – A Bit More Difficult for the Self-Employed

The following is a guest post from Crystal at Budgeting in the Fun Stuff, where she covers spending, saving, and budgeting for fun along the way.

When my husband and I bought our first home in April 2007, we made a combined income of $70,000 a year before taxes. I was a cubicle worker and he was an 8th grade science teacher. When we bought our current home in October 2012, we were both self-employed and brought in about $120,000 a year before taxes. You may think that a home loan would be easier to get when you earn more, but youâ€™d be wrong.

Getting Pre-Approved

I generally went about getting pre-approved for a home loan the same way for both houses. I went online first and found bank and loan sites that stated general interest rates and terms. You can pretty much find a place for you no matter where you live. For example, Newcastle Permanent can work for any Australian buyers. I concentrated on companies that served Texas.

I applied for pre-approval from the broker that offered the lowest interest rate based on all of our circumstances. In 2007, I found a bank with low interest rates pretty quickly and was pre-approved for a $200,000 loan before the ink probably dried on the paperwork I filled out. We ended up buying a $114,000 home.

Fewer companies would work with us this last time in 2012. I needed 2 years of tax records to show our income from self-employment, which I had. But the trick was that it wasnâ€™t solely self-employment income. It was a mix of our day jobs and our online business income since I only went fully self-employed in July 2011 and my husband didnâ€™t join me until January 2012. We were a risk since nobody really knew how we would do long-term.

But I did find a few mortgage brokers willing to work with us. I ended up choosing the one that seemed to have the best deal terms. We were pre-approved for a $300,000 loan.

Actually Closing

I thought the hard part was over since we were pre-approved. I was wrong. The home we chose to have built came to a total of $261,000. The builder contributed 3%, and we were contributing about $50,000 for the 20% down payment. So our loan amount ended up landing at around $208,000. That is more than $90,000 less than what we were pre-approved for, so I was surprised that the mortgage broker still acted worried every step of the way that we were borrowing too much.

To this day, I have no idea why they pre-approved us for $300,000 if they were going to freak out every step of the way on a $208,000 loan. By the time we actually closed, they had pushed back the date about a week and a half by triple-checking our credit history, having us resubmit paperwork and declarations, and generally just dragging their feet. It was like pulling teeth to actually get a mortgage that would be making them 4% for the next 30 years (well, 10-ish years since we are shooting to pay it off early).

In the end, we were able to buy our new home. We even paid off our first house completely in April 2013. It has made an excellent rental property. Everything worked out well. But it didnâ€™t come to us stress free. Just keep in mind that self-employment may be perfect for you, but there are a few negatives to keep in mind as you go along.

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Clever Dude

1 Comment

Good post! it is definitely more difficult for self employed borrowers to obtain a mortgage in today’s marketplace. There are too many factors that elevate the risk level on self employed loans – and risk is what lending is all about… Did your broker actually have their underwriting dept review your file in the beginning? Most likely not, as most brokers, correspondent, and even banks do not do this. In fact, what probably happened was that your LO just reviewed your docs himself, and made a judgement call – which explains why he may have seemed a little uneasy throughout the process. I like to have my underwriters review and pre approve all of my clients upfront…that way everybody is on the same page from beginning to end…